Originating: The Legacy Discussion

September 30, 2011

Written by Alain Valles, as originally published in The Reverse Review.

When I hear, “I want to leave my house to my kids!” I know it’s time for the legacy discussion. A person’s desire to leave something of value, especially property, to the next generation is common and perfectly healthy.

As people age they have fewer requirements for material items and begin thinking more about how they will be remembered. The challenge is bridging the discontinuity between the senior’s current situation and their end-of-life wishes.

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I follow a three-step process to facilitate a conversation about a person’s legacy. I start with a budget analysis, then explore possible solutions, and finally encourage family and trusted advisor involvement. This frames the senior’s legacy analysis and helps in developing a specific plan.

Whether I meet with clients before or after reverse mortgage counseling I always invest the time to review their budget. I want to make sure the reverse will be a long-term solution. Many of my borrowers are in very difficult financial straits involving high current mortgage balances, lack of monthly cash flow, deferred home maintenance, and costly health care issues. The better the senior understands their budget, the easier it is for them to come to terms with whether or not they will be able to leave much home equity.

The eye-opener for a 62-year-old is when he or she understands that a $250,000 reverse mortgage on a home valued at $400,000 will have more than a $1 million balance in 25 years, and that (depending on property appreciation rates) will likely have very little or no remaining equity. It’s as if someone just let the air out of a balloon. The flip side is the senior will not have to make a mortgage or equivalent rent payment for that time period and beyond, which would equate to more than $360,000 using a $1,200 per month housing factor. The critical question is this: Does the senior really need a reverse mortgage? And if so, how much projected cash will he or she need on a monthly basis?

After analyzing the budget it is time to transition to possible solutions. The options are better for clients with no current mortgage. Perhaps a tenure payment and line of credit will cover any monthly cash shortage while minimizing the long-term increase in loan balance. For relatively small projected reverse balances life insurance may cover the loan payoff. Or perhaps there are other available assets, such as other real estate, that are not presently liquid, that could pay off the reverse.

Unfortunately, this is seldom an option for clients who have a large current mortgage or significant immediate cash need. In either case, I start with the premise of not obtaining a reverse mortgage and use the senior’s provided budget figures to estimate how long they might be able to finance their lifestyle. More often than not there is less than three years’ worth of available assets. I believe that people with more significant assets are not investing their time learning about reverse mortgages.

I then model how a reverse mortgage may help finance their budget and the corresponding loan balance over time. It comes down to a quality-of-life decision. If the senior truly wants to bequeath the house then he or she must change their budget or find alternative sources of cash. Cutting monthly expenses is difficult at best without causing pain, which leads to the idea of moving from the home. Moving would work if the person sells the home, sets aside the profit as their legacy, and is able to find replacement housing that meets their budget, such as less expensive housing or living with a family member. Often the senior strongly affirms that they “never want to move” while also mentioning the sentimental value of leaving the home to the next generation. This is the perfect segue to suggesting a talk with their family.

This last step bridges the gap between the current financial reality and the desire of leaving the home to the kids. I hear over and over again how adult children want their parents to enjoy a high quality of life, that they don’t expect a large inheritance, and, without meaning to offend mom or dad, don’t really want the house – especially in the condition it may be in after another 25-plus years. In situations where adult children want to retain the home we explore scenarios where they financially contribute any monthly cash shortfall or home maintenance costs instead of a reverse, or perhaps the children may wish to fund a life insurance policy to cover the reverse mortgage balance.

Involving other family members gives the senior permission to focus on their personal quality of life and reduces the perceived obligation of leaving material worth. A secondary benefit to this type of conversation is that it minimizes the children’s concerns of financially supporting their parents in the future.

I end group family meetings by sharing the second definition of legacy — “anything handed down from the past” – and mention that sometimes the most lasting gift is peace of mind.

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